New Way for Banks to Compute Interest Rates MCLR

With
the general complain being about how full transmission of the RBI's rate cut to
the public has not happened, the central bank in December had come out with a
new guideline mandating commercial banks to shift to a new form of deciding
lending rates.

The new instructions talk about calculating rates on the basis
of the marginal cost of funds-based lending rates from April 1, 2106 onwards. The
fresh guidelines would force the banks to revise their lending rates regularly
thereby mandating transmist

1.
What is MCLR?

MCLR
stands for Marginal Cost of Funds Based Lending Rates. This is a new
methodology that banks would use to calculate the interest rates on loans and
will replace the existing base rate method of calculation.

The
RBI has asked banks to implement it from April 1, 2016.

2.
Why is the RBI forcing banks to do so?

The
RBI has asked banks to implement this method be cause it felt that its interest
rate cuts were not reflected in the ultimate bank lending rates for customers.
For instance, over the last 15 months the RBI cut policy rate by 125 basis
points while banks re duced their lending rate in the range of 50-75 basis
points. A basis point is 0.01 percentage point. The RBI hopes that the new
methodology would be force banks to cut rates.

3.
What is the calculation process under MCLR?

Banks
would have to determine their best lending rates on the basis of their cost of
funds which has to be calculated ev ery month. The following 4 have to

4.
What is new in this methodology?

The
most important factor that goes into calculating the lending rate is the cost
of funds. Under the base rate system, banks had to factor the average cost of
deposits. Under the new method, banks would have to factor in the incremental
cost of funds. Lending rates have be revised every month, which makes it
dynamic compared to the base rate.

5.
What happens to the existing borrowers?

Existing
loans and credit limits linked to the Base Rate will continue till repay ment
or renewal is due. Existing borrowers will also have the option to move to the
MCLR linked loan at mutually acceptable terms.

6.
How would banks convey the rates to customers?

Banks
will have to review and publish their MCLR of different maturities every month
on a pre-announced date. They will specify interest reset dates on their
floating rate loans.

New Way for Banks to Compute Interest Rates MCLR
Reviewed by S. Chitra
on
April 03, 2016
Rating: 5 New Way for Banks to Compute Interest Rates With the general complain being about how full transmission of the RBI's rate cut to ...